A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 13

Choosing Stop-Loss Points

It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would “let them out even.” And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break “shook them out,” and prices just went so much lower because so many people had to sell, whether they would or not.

—Edwin Lefèvre

The success of chart-oriented trading is critically dependent on the effective control of losses. A precise stop-loss liquidation point should be determined before initiating a trade. The most disciplined approach would be to enter a good-till-canceled (GTC) stop order at the same time the trade is implemented. However, if the trader knows he can trust himself, he could predetermine the stop point and then enter a day order at any time this price is within the permissible daily limit.

How should stop points be determined? A basic principle is that the position should be liquidated at or before the point at which price movement causes a transition in the technical picture. For example, assume a trader decides to sell September natural gas after the mid-October downside breakout has remained intact for five days (see Figure 13.1). In this case, the protective buy stop should be placed no higher than the upper boundary of the July–October trading range, since the realization of such a price would totally ...